Conglomerate diversification

Conglomerate diversification
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Methods and techniques

Conglomerate diversification (also: unrelated diversification) mainly involves offering new products or services to new customers. It is used as a strategy to grow on the market and gain new customers, which are no interested in current offerings. New products and services created during conglomerate diversification strategy, are usually totally different than products or services currently in the offering. Main goals of conglomerate diversification is to grow sales and profits in the same time maintaining current marketing activities. After incorporating the conglomerate diversification strategy, the company's offer is expanded to include products not related to the older ones. Sometimes it also involves stopping the production of previous. Changing offer brings many benefits. This diversification allows penetrating new markets and reaching new customers, which is the most important for the company.

Diversification strategy is based on action towards new products and new markets. Diversification is usually used in large companies. It causes big changes in the scope of:

  • organizations
  • financing structure
  • management of the enterprise(Picone P. M., 2012).

It involves checking the company's strengths in the new fields, in order to acquire new competences, increase competitiveness and, above all, to ensure new markets.

The precursor in the field of company's strategy was H. I. Ansoff. He believed that the development of the company means the introduction of new, different from the current products and then, selling them on a completely new market. Conglomerate diversification is the highest degree of differentiation of the company, because it often uses new technologies. This type is one of the main directions of evolution of the enterprise in highly developed countries (Ansoff H. I. 1957).

Reasons for using the diversification strategy[edit]

The company's management decides to the choice of a diversification strategy for a number of reasons. However, it should be remembered that making such a decision should be preceded by the efficiency testing process, because any wrong decision can cause economic and organizational consequences. There is a few reasons why the company decides to choose diversicication strategy, for example:

  • willingness to create better corporate image, so that customers want to use the services of the current supplier,
  • uncertain and constantly changing environment,
  • huge competition,
  • lack of prospects for the development of the company,
  • striving to reduce costs in the enterprise,
  • reduce the probability of loss,
  • maximizing profits
  • desire to make a new, better product,
  • etc.

Advantages of conglomerate diversification[edit]

Based on many sources, we can list the benefits of the diversification strategy. The effects of conglomerates results of:

  • financial synergy - it consists in supporting individuals who have the greatest development chances,
  • effective use of the work of the administration and specialists, especially in supervising and conducting work,
  • savings and reduction of management costs (Coase, 1937; Williamson, 1975),
  • ability to use information,
  • etc.

Unfortunately, it also happens that the planned goals are not achieved. Conglomerate diversification can also cause major complications, for example:

  • problems with the company's image, loss of reputation and good position,
  • difficulties in management and organization,
  • unexpected inefficiency.

References[edit]

Author: Ewa Wójcik